Big fish, small pond

When Yangzijiang Shipbuilding decided to list shares overseas last year, it opted to forgo the well-trodden path leading Chinese firms to Hong Kong. Instead, the company did its initial public offering in Singapore, raising US$622 million in April 2007.

Barely a year later, Yangzijiang is one of 30 stocks that form the benchmark Straits Times Index (STI).

“Although the Singapore exchange is smaller, we got better attention from the government and the exchange [during initial IPO preparation,]” said Zhang Yao, Yangzijiang’s investor relations head.

Singapore’s equity markets are often viewed as a poor cousin of the larger and glitzier Hong Kong markets. But Chinese companies that have chosen to issue shares on the Southeast Asian bourse have done well for themselves.

There are now 143 Chinese companies listed in Singapore, up from 108 some two years ago, a nearly 40% increase. Analysts say that some of the most popular S-shares are the shipbuilder Cosco, property developer Yanlord and sportswear maker China Hongxing.

Nevertheless, the Singapore Exchange (SGX) remains a limited playing field for these firms. According to statistics from SGX and Hong Kong Exchanges and Clearing (HKEx), Singapore’s equity markets were worth US$564 billion at the end of 2007 compared to Hong Kong’s US$2.7 trillion market capitalization.

Pragmatic approach
The typical Chinese company that chooses to list in Singapore does so for a combination of factors. Pragmatism is high on the list. According to Chew Boon Leong, a Singapore-based analyst at Riedel Research Group, an independent research firm that specializes in equities in emerging markets, companies that offer S-shares may do so simply because they couldn’t get listed in Hong Kong.

“To some extent, [S-share firms] are those that find difficulty obtaining a listing in Hong Kong,” he said.

According to Zhang, Yangzijiang began planning to go public in August 2005. But mainland markets were weak at the time and the securities regulator wasn’t approving IPOs anyway. The firm wanted to list in a place where language and culture weren’t barriers to investor attention. It soon whittled down its choices to Hong Kong and Singapore. But paperwork issues meant that listing in Hong Kong would require a three-year wait.

“Therefore, Singapore was our only choice at that time,” he said. “This is the main reason we chose Singapore.”

China Hongxing Sports, which began its IPO preparations in the second half of 2004, also found itself in Singapore by process of elimination.

“We obviously had three choices: domestic exchanges, Hong Kong or Singapore,” said Hongxing CEO Denis Wu. “First of all, in 2004, the domestic market was not open for us to go public. Secondly, Hong Kong’s stock market was down after SARS then.”

S-share firms tend to fit a certain profile. They are private companies with a small pre-IPO market cap rather than state-owned behemoths. They also tend to be clustered around niche industries that have solid investor bases in Singapore.

Of the 11 water treatment companies listed in water-scarce Singapore, for example, almost all have a China link. A Singapore firm like Hyflux operates desalination and wastewater treatment plants in China, while companies like Epure and Asia Water Technology are Chinese firms offering shares in Singapore. Other niche sectors include shipbuilding, environmental control and food additives processing,” said Chew at Riedel Research Group.

On-the-ground activity
Then there is SGX itself and its dogged pursuit of Chinese share offerings. In April, for example, it opened a representative office in Beijing, following in the footsteps of NYSE-Euronext, NASDAQ and the London Stock Exchange.

But the exchange began wooing Chinese firms through provincial governments years ago. In 2005 and 2006, for instance, it signed agreements with the authorities in Zhejiang, Jiangsu, Liaoning and Shandong to identify and encourage local firms to offer shares in Singapore.

Singapore Exchange’s efforts seem to have paid off, at least in the case of China Hongxing.

“[SGX] was … trying very hard to bring over Chinese enterprises,” said Wu. “They held many road shows here and brought some of their professionals with them. We were one of the many Chinese companies invested to their shows, where we started our contacts with quite a few bankers and professionals.”

For S-share issuers, the decision has largely been benign. According to a report on Singapore-listed Chinese companies by brokerage CLSA, published in May 2007, S-shares have beaten the benchmark STI in Singapore and major China indices in Hong Kong. The CLSA analysts used the PrimePartners China Index, which tracks 25 S-shares in a broad array of sectors, to represent S-share performance. In the 16 months prior to April 2007, the PrimePartners index beat the STI by 52%.

The S-share index also beat the Hang Seng China Enterprises Index and the Hang Seng China-Affiliated Corporations Index, two major indicators of Hong Kong-listed Chinese companies’ performance, by 5-11%.

S-shares’ advantage over their Hong Kong counterparts extends to liquidity, according to CLSA. It argued that while Hong Kong trading volumes were certainly higher than Singapore’s, the comparison was inaccurate because of Hong Kong’s much larger market capitalization. When a metric called turnover velocity, which shows trading value relative to market capitalization, was applied, it turned out that S-shares had a liquidity of 2-4 times that of H-shares between January 2001 and April 2006.

In Hong Kong’s shadow
But small ponds are not always cozy. The sheer size of Hong Kong’s markets and their closeness to the mainland mean that it will always have an allure that Singapore will struggle to achieve.

“The hype, froth, excitement, is much more prevalent in Hong Kong,” said Fraser Howie, head of structured products at CLSA in Singapore and author of a book on mainland equity markets. “Hong Kong is the place to play China. Singapore may have bits and pieces.”

Hong Kong’s excitable investors not only lend their markets glamor and a sense of being in the thick of things, but they also conveniently drive prices up.

“There is little doubt that Hong Kong is the preferred choice over the Singapore exchange, where the pricing of IPOs have lower PE compared with Hong Kong,” said Chew of Riedel Research Group.

Some of the S-share issuers we spoke to agreed. Yangzijiang’s Zhao said that the Singapore market is not active enough and the price-to-earnings (PE) ratios are low. Wu of Hongxing had no complaint about trading volumes but believes share prices are still too low.

Distance is another crucial differentiating factor. While Hong Kongers have the benefit of proximity to the mainland when making their stock selections, Singaporeans, a five-hour plane ride from Shanghai, are further away from the companies whose stocks they may buy.

“Reporting and disclosure in China can often be weak,” Howie said. “For the Singapore investors, they may perhaps not be as aware of the problems [in China]; the risk factors may perhaps not be fully appreciated.”

As a case in point, Howie pointed to the well-publicized implosion of jet-fuel importer China Aviation Oil (CAO). The firm raised US$59 million from its IPO in 2001, Singapore’s largest that year. Three years later, it all began to unravel as traders at CAO made wrong-way bets on oil derivatives and lost US$550 million.

The investigation that followed found evidence of virulent corruption within CAO. Chief Executive Chen Jiulin ended up facing a string of charges, including deceiving investors and involving its parent company in insider trading. He received a four-year jail term and a US$243,000 fine.

The company’s finance head Peter Lim was sentenced to two years in jail and fined US$109,000 while three company directors in China received fines.

Robust regulation
But for some Chinese companies, the lesson from the CAO story – that the Singaporean authorities will prosecute even high-profile cases – underlines the island-state’s suitability as a financial base. One of those companies is China Essence, a potato starch producer with operations in northern China.

“I don’t think [there is a disadvantage to listing in Singapore],” said Zhao Libin, CEO of China Essence. “The mainland or Hong Kong exchanges may be influenced by the government; the Singapore exchange will not. We think it’s good.”

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